Agriculture Reference
In-Depth Information
measure of profi tability. The profi tability analysis model shows the relationship of profi t,
sales, assets, and owner's equity. Sometimes graphing fi nancial ratios over time is a highly
valuable management tool.
One of the areas in which development of a strong control system is most important is
credit, where upward spiraling costs often cause serious fi nancial problems for agribusi-
nesses. Two possible solutions are to make the extension of credit a profi t center or to offer
a discount for cash sales. In any event, credit programs should be planned and monitored
carefully in order to develop systems for determining a customer's credit-worthiness and for
minimizing accounts receivable or outright bad debts.
Financial analysis is a fundamental tool for the agribusiness manager. Although it is not
a substitute for good judgment, fi nancial analysis gives the manager important insights for
improved decision-making.
Discussion questions
1. Discuss the major value to agribusiness managers of evaluating the fi nancial condition
and performance of the fi rm.
2. Discuss the value of common-size analysis to the agribusiness manager. What insights
do these statements provide?
3. Describe what fi nancial ratios a general manager, the president of the fi rm's bank, a
prospective investor, and a government offi cial might track in an agribusiness. Explain
your reasoning.
4. What are the major categories of fi nancial ratios? Do all the categories need to be
evaluated for every fi rm? Why?
5. What are two reasons why an agribusiness fi rm might need to evaluate ratios
monthly? Under what circumstances would a less frequent fi nancial evaluation be
suffi cient?
6. List the limitations of ratio analysis for the agribusiness manager. What key issues
must the agribusiness manager be aware of if he or she is going to use fi nancial ratios
effectively?
7. What criteria should the agribusiness manager use to select the fi nancial ratios the fi rm
will monitor?
8. What are the advantages of using the profi tability analysis model as an analysis tool for
agribusiness managers? What specifi c ratios are used in the profi tability analysis model
to calculate ROE?
9. What specifi c actions might agribusiness managers take if the earnings side (ROS) of
the profi tability analysis model was below the desired level? And if the asset turnover
side was below the desired level?
10. How is the leverage ratio (debt path) related to the ROS (operating path) and asset
turnover (asset effi ciency path)? If the amount of debt used in the fi rm increases,
how will ROE be impacted?
11. Discuss the merits of graphing ratios. What insights does graphing provide to an
agribusiness manager?
Case study: ABC farm supply store
Use the following condensed fi nancial statements (
Tables 10.5
and
10.6
)
from the ABC farm
supply store to develop a profi tability analysis model for the company.
